Discussion
What interest rate is applied on balances on Cash Reserve Ratio (CRR) deposits maintained by Scheduled Commercial Bank (SCB) with RBI?
Answer: A
Correct answer: No interest rate is charged
No interest is paid on cash reserve ratio balances. The Reserve Bank paid it until 2007, when the RBI Act was amended to remove the provision.
The consequence is that CRR is a real cost to a bank, not merely a reallocation of its assets: deposits it has paid for sit idle at the central bank earning nothing. That is exactly what distinguishes it from the statutory liquidity ratio, which may be held in government securities that do earn a return - and why a change in CRR bites harder on margins than an equal change in SLR.
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